Pakistan’s growing external debt has reached a point where further borrowing may destabilize the economy, according to a report on ‘Developing Infrastructure in Central Asia, Impacts and Financing Mechanisms’ by the Asian Development Bank Institute (ADBI).
The report also detailed that the huge amount of debts and high debt servicing costs make it difficult for Pakistan to use its fiscal resources for infrastructure development. Consequently, the declining expenditures of the public sector development without the provision of appropriate substitutes from the private sector have damaged the country’s economic growth.
It revealed that the burden of these debts is transferred to the next generation, and repayment is the foremost problem in Pakistan’s fiscal policy. The external debt liabilities are dominated by long-term loans from international finance institutions, multilateral agencies, and the Paris Club.
The share of sovereign bonds (market-based external debt) in public debt is less than five percent, and another problem that exacerbates the high level of external leverage is the impact of the deteriorating value of the Pakistani Rupee. The devaluation of the currency means that the country will have to pay more interest in real terms, which will require higher levels of resource mobilization from domestic sources. This will lead to higher taxes on businesses and the public, especially since tax rises for the rich are not politically feasible.
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It indicates that the present burden of external debt does not allow the dependency of infrastructure development on foreign debt. The report noted that the majority of the present outstanding external borrowing belongs to program loans and that the share in infrastructure-related projects has declined significantly.
The lack of appropriate infrastructure, declining business competitiveness, the lower rate of growth, and economic miseries are interconnected variables. The lower growth of the economy has resulted in falling tax revenue and insufficient resources to operate government institutions.
It is also a common phenomenon that in the case of lower tax receipts and insufficient financial resources, the government has to cut back on necessary development projects and investment in public sector infrastructure.
The report further stated that the government in Pakistan has prioritized spending to meet its recurring expenditures like debt servicing, defense, and general administration, which is why spending on the development of infrastructure has become the lowest priority. This situation has led to deterioration in the physical infrastructure of Pakistan. The economy now faces a crisis in the supply of energy, a shortage of water, a badly damaged sanitation system, and outdated means of transportation.
The deterioration in infrastructure has also led to a lower ranking in business competitiveness, such that industries cannot utilize their available production capacity because of energy shortages, frequent interruption to energy supplies, and poor logistic facilities in transportation. The badly deteriorated physical infrastructure in Pakistan does not support economic progress and industrialization, and the lack of physical infrastructure has become the primary cause of declining growth in the GDP. Consecutive declines in the inflow of foreign direct investment are also a drastic indicator for the economy of Pakistan.
Attracting foreign and local investment, and discouraging the outflow of domestic capital are natural requirements for rapid industrialization and economic development. It is obvious that inducing private sector investment — both foreign and domestic — requires a significant and visible improvement in public goods infrastructure. The concern with these suggestions is the lack of sufficient funds for the required development.
A declining trend in development expenditures by the government and the negligible role of the private sector in infrastructure development in Pakistan indicate an alarming situation.
According to estimates from the Global Infrastructure Hub and Oxford Economics (2016, 2017), Pakistan faces a shortfall of $124 billion in infrastructure development between 2016 and 2040. Additionally, the size of this gap is more than the country’s total outstanding external debts.
The development expenditures-to-GDP ratio in the federal budget had always been greater than six percent before 1993 but was reduced to less than four percent after 1993 and even reached 1.8 percent between 2018 and 2019.
The last decade has reflected the fast deterioration in macroeconomic indicators, and Pakistan currently has the lowest development ranking in the region. A global comparison also confirms the deterioration of physical infrastructure in the country in terms of international ranking.
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Pakistan ranks 110th in infrastructure out of a total of 137 countries (WEF 2011, 2018), and the deterioration in infrastructure has badly damaged its economic competitiveness. Despite the desperate need for infrastructure development, the spending on this sector is negligible as compared to the spending on non-development expenditures, and even the investment in infrastructure with private participation is not satisfactory.
The report stated that no significant contribution from the private sector has been noted in infrastructure-related projects. The negligible share of the private sector in infrastructure development activities and the declining development expenditures of the government reflect the country’s deteriorating global infrastructure ranking. Deterioration in infrastructure was the obvious outcome of this policy and led to a decline in the growth of the GDP.
The private sector was reluctant to invest in gigantic infrastructure projects where the required magnitude of investment is much higher and the risks are greater than other types of businesses, while several complicated factors are involved in the estimation of risks and returns on such long-term investments.
Infrastructure financing requires more prudence in investment decision-making because of the longer duration of projects, high political risk, higher cash outflow at an earlier stage, and barriers to exit before the payback period.
Another risk that is always associated with large infrastructure projects, particularly in the construction of highways and land development, is ‘free riding’.
The support of the government is necessary to ensure payments by beneficiaries through user charges, fees, and taxes. This is why public–private participation is always required in infrastructure-related projects despite private investment. The report also noted that several types of support and guarantees from the government are required to make such investments feasible.
